Monthly Archives: September 2012

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1. There is an easy way to fix bad credit. No person or company can legally remove accurate items from your credit reports for a fee. The Fair Credit Reporting Act (FCRA) states that delinquent account information can remain on a consumer’s credit bureau file for a seven-year timeframe that starts 180 days after the account becomes delinquent.

2. Bankruptcy discharges all debts. Debts not dischargeable in bankruptcy will generally include back taxes less than three years old, student loans, alimony, child support and debts incurred through fraud. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require a bankruptcy counseling certificate as a prerequisite for filing.

3. A collector can’t call others (family, neighbors) about your debts. It may be hard to swallow; however, according to the Fair Debt Collection Practices Act (FDCPA), your collector is permitted to contact other people. They are only supposed to do this to find out where you live, what your phone number is, and where you work. Fortunately, the collector may not divulge the reason for the call to anyone other than you or your attorney. Also, if you don’t tell them otherwise, they can call you at work.

4. A divorce decree matters to your creditors. Your divorce decree is an agreement between you and your spouse (not your creditors) on how your debts and assets will be divided. Since your creditors were not involved in the settlement and had no input on the results, the contracts you signed with your creditors have not changed and cannot be changed by the divorce decree. Whoever signed the original contract with the creditor will still be obligated to pay the debt after the divorce. That means you are still obligated on these debts and the creditors can report the derogatory status of these accounts on your credit bureau file.

5. Your creditors cannot change your interest rate. According to the CARD Act of 2009, credit card issuers can make key contract changes to your account terms and agreement, including rate increases, with 45 days’ notice. You should also know that many creditors will now raise your interest rates if your credit score declines, even if you have paid their particular account on-time and as-agreed.

6. If your car gets repossessed, that’s the end of your responsibility. After a vehicle is repossessed, the lender will most likely sell it at auction to the highest bidder and apply the proceeds of the sale to the balance owed on the car. If the sale price is not sufficient to pay the balance due, there will be a “deficiency balance” remaining. You would be legally obligated to pay this deficiency balance.

“Fortunately, making financial decisions doesn’t have to be a confusing experience,” said Jo Kerstetter, vice president of financial education for MMI. “Educating yourself about money is the best defense against costly mistakes.”

The economy may still be wavering, but not the banks. They’re still sending consumers plenty of credit-card offers with enticing rewards, cash-back offers, and low interest rates.

Consumer Reports just analyzed more than 50 cards, including ones that are good for those struggling to pay off their credit-card debt. For those people, Consumer Reports recommends transferring the balances to a card with a lower APR. You can often find cards with very low interest rates, even down to zero, for balance transfers. But Consumer Reports cautions that you look carefully at the terms because they can vary a lot from card to card. You’re often charged a balance transfer fee-usually 3 to 4 percent upfront. And the zero percent or low APR often lasts only 12 to 18 months.
Consumer Reports found the Chase Slate card is good for people who can pay off the balance quickly. It has zero interest for 15 months and no transfer fees in the first 60 days.

But if you calculate that you won’t be able to pay off your debt that quickly, you’re better off with a card with a low, fixed interest rate.
Consumer Reports found one of the best such credit cards is the PenFed Promise. It currently has a low APR of 4.99 percent on transfers made before the end of the year and has no balance transfer fee. Be aware that you need to be a member of the PenFed credit union, which can cost $15.

If you pay your bill each month, Consumer Reports says a better choice for you is a card that offers rewards or cash back. A good choice is American Express Blue Cash Preferred. If you pay a 75-dollar annual feed, you get six percent back at supermarkets, three percent back on gas and at department stores and one percent back everywhere else.

Of all the debt collection scams, the ones that inspire the greatest panic come over the phone. A menacing, often almost incomprehensible voice, claiming to represent a creditor, demands immediate payment of a supposed debt. Otherwise, the caller threatens, the consumer could be arrested and thrown in jail.

“Outrageous!” we tell the many consumers who contact us every week seeking help after being cowed and frightened by these bullies’ threats. To each of them, we repeat the same advice: “Ignore their calls. Report them to local law enforcement.”

But what if local law enforcement is the source of those threats?

In some 300 communities across the United States, that’s exactly what’s happening. From Baltimore to Los Angeles, prosecuting attorneys are renting out their letterhead — and their law enforcement clout and credibility — to debt collection companies, as a recent exposé in the New York Times revealed. Using the name and official seal of the prosecutor’s office to give weight to their threats, these private companies — with no legal authority whatsoever — then send out letters to debt-challenged consumers threatening criminal prosecution and possible jail time if they don’t pay up.

And here’s the kicker: having convinced consumers that they’ll end up in handcuffs if they don’t cover their supposed debts, these weasels then try to dupe them into shelling out another $170 or so for a class on financial responsibility. Where does that money go? It’s split between the debt collection company and (wait for it) the prosecutor’s office.

How bad does this stink? Let me count the ways.

First of all, the district attorney is an elected representative with a sacred public trust: to enforce the rule of law. Before prosecuting a case, the prosecutor’s office has a duty to weigh the evidence, evaluate possible outcomes, and choose the course that best serves the public. That process should be thoughtful and impartial, with all citizens treated equally before the law, to ensure that justice is served in each and every instance.

When we elect a DA, we’re entrusting them with the power and prestige of the American criminal justice system — not inviting them to pass out guns and badges to random individuals with agendas of their own. And we most assuredly do not want them empowering private parties to pose, even implicitly, as public prosecutors — especially in pursuit of private gain.

This is one of many reasons why, if we do start deputizing private businesses, debt collectors might not be the best place to start. For one thing, as recent news reports show, we can’t always count on them to tell the truth. The case at hand is a case in point.

Consider what’s happening here. The debt collection companies are using the letterhead of the prosecutor’s office to threaten consumers with criminal prosecution and possible jail time. In reality, they’re in no position to back that threat up — but from reading the letter, the consumer has no way to know that. The truth is that in the vast majority of cases, the prosecutor’s office has no idea when these letters are mailed or who is receiving them, and has conducted no investigation to determine whether the claim of unpaid debt is actually true. Thus, the debt collectors are apparently mailing official letters without effective oversight — and often without even having the evidence they would need to prove that the recipients actually owe the alleged debts. In short, no case.

“I would say that roughly 90 percent of the credit card lawsuits are flawed and can’t prove the person owes the debt,” Noach Dear, a civil court judge in Brooklyn who sees up to 100 such cases a day, told the New York Times.

This is, indeed, outrageous. To have prosecuting attorneys renting out their letterhead to private companies at all diminishes their office and, at the end of the day, betrays the public trust. To do this without weighing the merits of each individual case betrays the fundamental American ideal of due process and turns the phrase “innocent until proven guilty” on its head. Finally, to allow private companies to use the power and prestige of public office to coerce consumers, using the fear of criminal charges and imprisonment to bully them into compliance — well, that is so clearly abusive that it’s hard to imagine how anyone could defend it (not that they haven’t tried).

When questioned, the prosecutors retort that renting out their stationery lightens the taxpayers’ burden by raising money (albeit it blood money) for their own cash-strapped operations while keeping bounced-check cases from clogging the courts. “I view it as quite a win-win,” Scott D. Shellenberger, Baltimore County State’s Attorney, told the Times. “You aren’t criminalizing someone who shouldn’t have a criminal record, and you are getting the merchant his money back.”

In fact, it’s a lose-lose-win. Consumers lose by getting intimidated into spending their limited funds on bogus financial education classes. Prosecutors lose clout and dignity. The only winners here are the debt collectors, who win their money and their fees no matter the impact on consumers or the justice system.

Now, I’m more sensitive than many to the needs of our outgunned, overloaded, underfunded justice system. As the former New Jersey Director of Consumer Affairs, who worked in the Office of the Attorney General, I’ve seen first-hand that for too many fraud victims — whether consumers or businesses — justice delayed is justice denied.

In this case, however, the prosecutors’ argument is as disingenuous as the letters themselves. A minority stake in a $170 fee doesn’t generate much in the way of revenue — and whatever money it does generate cannot possibly be enough to offset the harm done to consumers who may be getting railroaded by false collection notices. Add to that the money some prosecutors are spending to defend themselves against lawsuits brought by consumer lawyers, who contend — I believe correctly — that this practice violates several of the supposedly inviolable pillars of the American justice system.

As Paul Arons, a consumer attorney in Washington state, told the Times, “This is guilty until proven innocent.”

As we all know, that is the very opposite of the way it’s supposed to go. Before a prosecutor uses the power of his or her office to help a private company collect money from an individual accused of bouncing a check, that office should first investigate the allegation, then make a probable cause determination that the check was bounced on purpose. Unless a prosecutor has the staff available to ride shotgun on these cases, making sure that each consumer who receives a collections notice actually owes that debt, the letters should not bear that prosecutor’s name and seal. To do otherwise undermines the integrity of his or her office.

Furthermore, do prosecutors really want to entrust their good names to the scandal-plagued debt collection industry — potentially putting both their office and their future political careers on the line — over bounced checks and a paltry payback? That’s not just bad justice, it’s also bad strategy. Here’s a political prediction: The first family wrongfully pushed into bankruptcy or foreclosure by one of these collection letters will be the last court case that prosecutor tries.

Finally, let’s take a harder look at these “financial responsibility” classes. What legal or judicial purpose could they possibly serve? If a person defrauds a retailer by deliberately kiting a check, the issue isn’t financial responsibility — it’s criminal intent. The proper response isn’t a menacing letter — it’s jail time.

But the vast majority of people who receive these letters are not criminals — they’re ordinary Americans who honestly believed they had the money to cover a purchase. Besides, it’s not as though they won’t suffer for their mistake: the fees imposed by banks and retailers in such cases inflict significant pain, especially for people of limited means. They know they goofed, and rattling legal sabers or coercing them into spending $170 on a bogus class won’t change that. What’s more, while it might be financially expedient for prosecutors and debt collectors, using the power of law enforcement to coerce consumers into spending money they don’t have is no way to teach financial responsibility. Frankly, it denigrates the concept of financial literacy.

Both in 2010 and the current election cycle, we are witnessing the harsh reality of a political system that is up for sale. American justice has always been special and the system must not be sold to the highest bidder — not to lobbyists, not to politicians, and certainly not to debt collectors. District attorneys cannot continue to sully their reputations and demean our institutions by renting out their letterhead to the lowest life form that bids. As citizens and as consumers, we deserve better.

One out of five consumers who purchase their credit score will likely receive a “meaningfully different score” than a lender, according to a study released Tuesday by the Consumer Financial Protection Bureau.

As a result, the CFPB says, people are likely to end up with loan terms that are different from what they expected to get, or they could waste time applying for a loan for which they’re not qualified. “This underscores what we’ve been talking about for years — there’s really no guarantee that the scores you can buy will be the same type of score the lender is looking at, or that it’s even commercially available to the lender,” says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.

As we’ve reported previously, consumers can order their credit scores from more than 20 websites , up from around five a few years ago, at a cost of up to $20 a pop. The problem is that consumers often think that there’s one uniform credit score, when there are actually several types of scores for sale. They include the VantageScore that was created by the three main credit bureaus Equifax, Experian and TransUnion, as well as separate scores created by those bureaus individually.

While the most commonly used score remains FICO — it’s used in 90% of lending decisions, according to financial-services research firm CEB TowerGroup — 49 different versions of this score are available to lenders, says Ulzheimer. The various scores assign more weight to certain characteristics, such as a borrower’s credit-card activity or history with car loans or mortgages.

Whichever score the lender consults will ultimately determine whether the consumer gets approved for the loan, how much of a credit line he or she receives and at what interest rate. Consumers generally don’t know what score lenders have used to come to their decision — unless they’re rejected for a loan or given a rate that’s higher than what the lender advertises. A rule from the Dodd-Frank financial overhaul kicked in last year that requires lenders in such situations to automatically present borrowers with the score they used.

Some consumers are impacted more by credit-score variations than others. The CFPB’s study found more variation among older consumers and among consumers who live in higher-income ZIP codes. Experts say these individuals have more access to credit than younger or lower-income applicants, making their credit information lengthier and possibly more prone to variations.

Beyond the difference of a few points, variations could lead to a borrower being in a different credit-quality category than he or she otherwise believed based on the credit score they consulted. Different scoring models can lead to consumers being off by one category 19% to 24% of the time, according to the CFPB.

U.S. credit-card debt edged up 0.2% last month from a year earlier, though regions hard hit during the housing crisis saw declines, according to a report released by credit-reporting company Equifax Inc.

“In places where the housing bust was the worst, such as Florida, California and Nevada, and in places like Detroit and Ohio where the recession was particularly deep because of a dependence on manufacturing, consumers are continuing to be prudent about using credit,” said Trey Loughran, an Equifax executive. “In other pockets of the country, consumers are feeling a bit more confident to take on new debt.”

According to a report looking at credit-card data covering the largest 25 metropolitan regions, consumer credit-card debt was $585.3 billion in August, down 22% from its peak in October 2008.

Metropolitan areas including Detroit, Las Vegas, Los Angeles, and Sacramento, Calif., posted a more than 1% drop in overall credit-card debt during August. However, metro areas such as Houston and Washington reported increases of more than 1%.

Around 3.5 million Discover Financial Services (DFS) credit card holders will receive a refund to compensate for “deceptive telemarketing and sales tactics” for add-on products, U.S. regulators said Monday

The $214 million settlement with Discover, which was disclosed by the company late Friday, is the second pact this year with a credit-card company reached by the new Consumer Financial Protection Bureau. It follows a similar agreement two months ago with Capital One Financial Corp (COF).

Discover, based in Riverwoods, Ill., was ordered to refund about $200 million to cardholders who purchased the products over the phone from December 2007 through August 2011. Discover also will pay $14 million in penalties to the Federal Deposit Insurance Corp. and the CFPB, which will split the amount.

The agreement requires the company to make changes to its marketing practices. “We have worked hard to earn the loyalty of our card members, and we are committed to marketing our products responsibly,” the company’s chief executive, David Nelms, said in a statement late Friday. A company spokesman declined to comment on Monday.

The regulators found that telemarketing scripts used by Discover contained “misleading language” that was likely to be deceptive to consumers, who didn’t realize that they were purchasing the product, implying that the products were a free benefit rather than something offered for sale. Sometimes, the regulators said, consumers were enrolled without their consent.

Discover is the latest credit-card lender to get hit by regulators over its sales of add-on services, including payment-protection products that aim to help borrowers make monthly payments in the event of a job loss or other hardship.

Capital One in July agreed to pay $210 million to settle allegations that it failed to properly monitor third-party sales of payment-protection and identity-theft-monitoring services. The amount comprised $150 million in customer refunds and $60 million in fines by the CFPB and Office of the Comptroller of the Currency.

Many banks have recently halted sales of the products as regulators intensify their focus on lenders’ marketing tactics. Consumer advocates have argued that the products provide little financial benefit to consumers.

Consumers paid $2.4 billion in fees for payment-protection products in 2009, according to a March 2011 report from the Government Accountability Office.

A sour economy has changed the focus in a divorce from dividing up a couple’s assets to parceling out debts, attorneys say.

The shift from assets to debt was gradual, but it’s been the standard since 2009, attorney Greg Leopard said.

While many couples ignore their financial future when they get married, it’s an overlooked component at the end of marriages, too, Leopard said.

Newlyweds trust that “ ‘our love will get us through it,’ but there are no cute sayings with divorce,” Leopard said.

While the debt held by the average American household is dropping year after year, the Federal Reserve’s most recent Survey of Consumer Finances shows that the median American family’s net worth dropped 38 percent from $126,400 in 2007 to $77,300 in 2010.

Attorney Willie Saunders said the size of the debt in Augusta varies. Negotiations typically take place when student loans, mortgages, car loans and credit card debts balloon past $15,000. A deciding factor is often who stands the most to lose if the debt goes to collections and a person’s credit rating is affected. In a military town, that’s especially important because security clearances hinge on clean finances, Saunders said.

Some states apply a “community property” principle to divorce, meaning assets and debt are generally split 50/50. But both Georgia and South Carolina are “equitable distribution” states, meaning it’s ultimately up to a judge to decide on a fair distribution.

If a divorce is uncontested, both parties work out an agreeable solution and the judge usually approves it.

If neither side can agree, then “it’s up to a judge to make those hard decisions and he has a lot of latitude on how to divide debts,” attorney Richard Goolsby Jr. said.

Sometimes a divorce isn’t even financially feasible because of debt. That’s especially the case when a split family is paying the mortgage on a house or the rent on an apartment and other new living expenses. For some families, the right choice is to examine the options presented by bankruptcy before committing to a divorce, Goolsby said.

Divorce is frequently an emotional tinderbox, but cooler heads seem to prevail when the issue is debt and not assets.

“People tend to be more cooperative,” Leopard said. “There’s a realization that both sides have to work together.”

The Consumer Financial Protection Bureau will propose changes to regulations that critics have charged could bar stay-at-home mothers from obtaining credit cards, its director, Richard Cordray, said today.

“We will need to engage in rulemaking. We have made a determination to proceed,” Cordray said at a hearing of the House Financial Services Committee.

He said the agency would propose the rule before Congress reconvenes after the election. It could affect major credit card issuers such as Capital One Financial Corp., JPMorgan Chase & Co. and Bank of America Corp.

The plans stem from an effect of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which governs how card issuers consider applications from non-working spouses.

The Federal Reserve, which wrote the first regulations under the law, stated that a card issuer may not determine a customer’s ability to repay by relying on income or assets of a person who is not liable for the debt unless the applicant has an ownership interest in the other person’s assets or income.

Petition Drive

Members of Congress including Representatives Carolyn Maloney, a New York Democrat, and Shelley Moore Capito, a West Virginia Republican, have argued the rule could limit the ability of non-working spouses to get credit. Holly McCall, a former employee of Capital One and subsequent non-working spouse, started a petition against the rule.

Cordray said he largely agreed with their assessment.

“We have determined that it is a significant problem,”Cordray said. He added that “tens if not hundreds of thousands” of Americans have been denied access to credit as a result of the rule.

Cordray said the bureau concluded a regulation — rather than a clarification or change to the law — was needed after months of gathering information and data from the credit card industry. The CFPB solicited public input during a six-month period ending in June, in which it sought comment on possible changes to regulations it inherited from other agencies.

The number of open credit card accounts topped 175 million in July, the highest number in 31 months.

In May, credit card lending to subprime borrowers was almost 14 percent higher than it was when the recession led to a low point in 2010.

Partly as a result of easier lending policies, the number of new credit cards issued in the first five months of this year reached 13.8 million, 10 percent up on the same period last year.

Also between January and May 2012, the combined credit limits on new cards was $25.1 billion, up 16 percent on the same figure for the same period in 2011.

In July 2011, balances on all credit cards were $48.9 billion. In the 12 months after that, they jumped by $2.6 billion, or 5.3 percent.

All of those data were derived from the August 2012 National Consumer Credit Trends Report, which was published by Equifax, one of the big-three credit bureaus.

Meanwhile, Collections & Credit Risk magazine, a trade journal for the debt industry, reported on Aug. 28 that “charge offs” (industry jargon for when credit card companies write debts off their books, and pass them for collection) increased for four of the six biggest card issuers in July.

Credit card debt — misery to be avoided

All of this paints a pretty bleak picture of the future. Just a few years ago, unmanageable credit card debt bought stress, poverty and downright misery to millions of American families. After a quite brief period of relative sanity, during which households generally reduced their debt levels, are we really already willing to go down that road again, with greedy lenders serving up too much credit to subprime borrowers, whose chances of repaying in full are, by definition, less than good?

Roughly a year ago, this writer posed a similar question. In that piece, he accused the executives who run credit card companies of having shorter memories than goldfish swimming in water laced with LSD.

Credit card companies’ case

How would card issuers respond to such charges? Well, they may well make four main points:

The economy’s getting better. As Equifax chief economist Amy Crews Cutts put it in a recent press release: “The economic recovery is increasing both demand for new credit cards and the supply of credit.” So, as long as that recovery continues, most consumers should be able to stay on top of their credit card debt.

Consumers are acting more responsibly, and can be trusted more. The August 2012 National Consumer Credit Trends Report found that consumers are both using less of their available credit, and increasing their payment ratios.

That uptick in charge offs in July was tiny, and lower than would be normal at that time of year. The number of people paying their card bills late held steady, and experts expect charge offs at many issuers actually to decline in coming months, according to Collections & Credit Risk. Equifax, presumably using different data from the magazine, says that July charge-offs reached a 56-month low.

Credit card companies have new and better IT tools that allow them to differentiate more accurately between subprime borrowers who once experienced temporary difficulties but are now creditworthy again, and those who are genuine deadbeats. In July, Equifax unveiled TIP, its latest such product, which, it claimed, meant: “Credit card issuers can nowsuccessfully identify prospective consumers with a higher propensity to borrow and repay…” In other words, credit card offers can be more accurately targeted at those who both want to borrow, and are able and willing to make payments.

Good points, but…

You have to admit that some of those points are persuasive. So why does this commentator still worry so much about significant increases in credit card debt? Two reasons:

Time and again, Wall Street (including the major card issuers) has proved that it can’t escape its mindset of short-termism. All too often, it’s hard to avoid the conclusion that the people who make lending policies have an eye on the current quarter’s figures — and their bonuses — rather than on borrowers’ long-term abilities to repay debt.

For lenders, debt is a numbers game. They know that x borrowers are likely to default, and they build those risks into their computer models, making sure as best they can that the credit card rates they set, along with their other revenues, protect their profits from their charge-off expenses. Contrast that with the experiences of individual consumers who find themselves unable to stay on top of their debts. They face personal tragedies that usually involve real hardship, often for whole families.

Credit cards can be good

There’s absolutely nothing wrong with modest levels of credit card debt, providing borrowers’ obligations remain manageable. indeed, it’s hard to see how the economy can fully recover until prosperous and secure Americans again become more comfortable with credit. And it’s undeniable that, in general, a credit card offers more consumer protections and benefits than any other form of payment. But, at least for now, shouldn’t plastic be reserved for those who have proved they can handle it well?

That’s the subject of a crucial but little reported tug of war going on between the fledgling Consumer Financial Protection Bureau and the real estate industry.

The National Association of Realtors is furiously lobbying against a range of new regulations it contends will further restrict the flow of credit to prospective home buyers.

Some of this stuff is a bit arcane. That said, a provision being mulled by the fledgling new federal agency – one that would cap how much outside debt a prospective buyer could bring to the table – is anything but obscure.

The new federal consumer bureau wants to cap the amount of debt a prospective home buyer could take on to 43 percent of total income. The norm is typically 36 percent.

Sounds pretty common sense to me, but, then again, I don’t make my living selling homes. In fact, if your debt to income ratio hits 43 percent, “financial difficulties are probably imminent unless you take immediate action,” according to a guideline put out by U.S. News & World Report based on the “The Ultimate Credit Handbook.”

Hit 50 percent and you are told to “get professional help to aggressively reduce debt.”

Not so, contends NAR, which contends 20 percent of today’s home buyers wouldn’t qualify if home buyers can’t be allowed to surpass the 43 percent debt-to-income ratio. (The trade group attacked the provision in a letter to Ben Bernanke, arguing that new restrictions on mortgage lending could help defeat the Fed’s massive new $40- billion-a-month effort to keep lending rates at rock bottom levels.)

OK, if the real estate recovery hinges on heavily debt laden buyers being encouraged to take on even more debt, we are in a lot of trouble then.

Maybe I am missing something. But how it is a good thing that we have a significant chunk of new home buyers out there with roughly half their income going to debt payments?

It’s conceivable some of these newly minted homeowners will find a way of muddling through should the real estate market and economy continue to stumble forward.

But should the European debt crisis explode or another recession hit, it seems likely we are looking at the next wave of foreclosures.